Phat Snax Ltd is a manufacturing company that sells biscuits and snack foods to a large number of retailers nationally. You have turned your attention to the audit of inventory and have obtained the following information from client staff:

Year-end inventory is expected to be as follows:$000

1. Raw materials 850
2. Work in progress 525
3. Finished goods 1,005

2,380

Information:

1. This represents 20% of total assets.
2. The company uses standard costing to value its inventory, which consists of approximately 150 product lines. At year-end, a relatively equal inventory value of each of these lines will be held.
3. The inventory is stored in approximately fifty warehouses nationally. The company has a policy of taking out short-term leases on unused warehouse space (to minimise rental costs), so the number of warehouses in use varies over time.
4. Goods are manufactured centrally at the Kickatinalong factory and then shipped out to the warehouses.
5. The recent launch of a new biscuit, Lamington Bix, resulted in poorer than expected sales. Consequently, the company has excess inventory in finished goods, amounting to $200,000. Their use-by date is 6 weeks after the reporting date.
6. A new work-in-process system was successfully introduced 2 months after the previous year-end. Staff have commented on how this system is a great improvement.
7. Raw materials largely comprise bulk inventories of flour, rice, and potatoes. These are held in large storage bins at the Kickatinalong factory.
8. Work in process largely includes biscuit dough, which is stored in several locations throughout the Kickatinalong factory both in large sealed vats awaiting processing and in mixing bowls attached to the ten different production lines.
9. As in previous years, all warehouses and the Kickatinalong factory will be closed at reporting date to allow a full stocktake. A perpetual inventory system is used.
10. From your experience in previous years, you know that the company has a highly accurate budgeting system. Final figures rarely vary more than 3% from budget.

Required

1. Identify and discuss the key financial statement assertions for the audit of inventory at Phat Snax Ltd. Support your answer with reference to information in the question.(4.5 marks)
2. Identify the specific issues to be considered in relation to the existence and valuation assertions for the audit of Phat Snax Ltd's inventory balance. Note that some specific issues may be relevant to both assertions. Outline the audit procedures you would undertake to cover these issues.(4.5 marks)